Contents

ABS

UK ILS hub to drive new issuance, innovation

The proposed ILS regulatory and tax regime due to come into effect on 1 January 2018 aims to put the UK on an even-footing with other jurisdictions and enable it to become a world leader in the catastrophe bond market (SCI 21 July). Notably, the framework is expected to create an accommodating tax environment for ILS vehicles, making it financially viable and efficient to issue in the UK - which could boost issuance and stimulate product innovation.

In terms of motivation behind the framework and its timing, Katherine Coates, partner at Clifford Chance, comments that the government is keen to maintain London's status as the centre of insurance and reinsurance and to capitalise on the recent growth of ILS. It has benefits too from a regulatory perspective.

"Regulators don't like the risks involved in significant volumes of ILS being done offshore - if it is kept onshore, they can keep a closer eye on the sector's development and its impact on UK-based cedants, while at the same time supporting the UK insurance industry," she says.

The ILS framework will help make London comparable with several other jurisdictions and facilitate its compliance with Solvency 2. "A major feature is the tax treatment, including a corporation tax exemption for ILS vehicles, which puts them in a similar tax position to those in other countries," adds Coates.

She continues: "Another significant tax feature is a complete withholding tax exemption on debt and equity payments made from an ISPV to investors. This means investors will receive returns equivalent in tax terms to those which they would receive from a direct investment in the underlying business and there is no additional tax at the level of the ILS vehicle."

Additionally, the framework will permit the formation of protected cell companies (PCCs) with similar treatment to those in offshore jurisdictions, so that multiple ILS deals can be done through a single issuer, something not previously possible in the UK. This will put the jurisdiction on an "even keel" and avoid the "time-consuming, costly and off-putting procedure of setting up an individual vehicle for every ILS transaction," according to Coates.

The question remains whether the new framework will be delivered on time and whether it will achieve its objectives. It still requires approval from the UK PRA and FCA, but Coates is strongly optimistic for the plans and believes "it should help to broaden the ILS market, boosting issuance but also stimulating the creation of more innovative products."

It is these products that investors are clamouring for and, as part of the proposal discussions, they have been very receptive. Coates comments: "There is significant investor appetite for ILS products and I've seen strong interest from investors in these UK developments. Investors are attracted by the returns, which compare favourably with yield in many other sectors, and the non-correlated risks of ILS compared with other investments."

Furthermore, the 1 January 2018 deadline seems achievable, if tight. But if it's missed, the UK won't see any of the ILS business at the start of the year, which is a further incentive for timely completion. Coates doesn't believe that missing the deadline is likely, however, and is hopeful that UK-domiciled ILS transactions will come through in 2018.

Otherwise, Coates suggests that there haven't been any negative ramifications so far and even the traditional firms in the space have been supportive of the proposals. She concludes: "I see a lot of support from the traditional corners of the industry - insurance and reinsurance firms have been universally and wholeheartedly supportive of the changes, as they see it as another way of increasing capacity to support their business."

RB

ABS

Peripheral ABS playing catch-up

Structured finance issuance in the European core has held up well over the summer, with spreads continuing to grind tighter. Although peripheral ABS spreads remain wide of the core, the periphery appears to be catching up.

"Spreads throughout Europe - in both the core and periphery - have been going in the same direction for a while now, albeit at different speeds. All spreads are compressing, it is just that peripheral spreads remain a lot wider than core spreads," says one market participant.

Dutch RMBS has reached pre-crisis levels, with auto ABS not far from that marker. Less consistent issuance away from the core makes it difficult to identify broad trends in the periphery, although country-based tiering appears to be compressing.

"With products such as UK or Dutch RMBS, there is sufficient primary market activity to direct the market; there are big prints that define where the market is going. However, in the periphery, primary market issuance is more limited and therefore the patterns are harder to discern," says Colin Behar, senior investment analyst at Prytania Investment Advisors.

He continues: "There have been some interesting auto ABS deals in the periphery, as well as a few RMBS in Italy and Spain, that have provided interesting colour. However, many of these deals, particularly recent auto ABS from Spain and Portugal, are opening the market and therefore they are issued with considerable spread pickup for investors at inception."

Beyond spread tightening in the core's wake, the main shift in peripheral ABS appears to be a shift from a healthy balance between fundamentals, technicals and correlation to sovereign spreads, to pricing driven almost entirely by supply dynamics.

"The technical consideration for the periphery has always been supply, but that is very limited at the moment. Supply now mainly comes from the secondary market, where previously bad banks and legacy holders provided plenty of paper but now there are fewer sellers," notes the other market participant.

They continue: "The improvement in spreads has made people less willing to sell, and BWIC volumes have halved over the last 12 months. Some paper, of course, has just never come to market - there are programmes, such as BBVA, that you never see trade - and other paper which used to trade is now trading less often."

This market participant believes that the previous balance between technicals, fundamentals and sovereign spreads has become completely imbalanced, with the imbalance of demand and supply now "simply outweighing any other consideration".

Fundamentals still have their place, however. Behar notes that Spanish ABS provides a good example of investors increasingly assessing a sector simply on its merits.

"Spanish autos are now trading tighter and more in line with the actual risk, whereas when that market opened the paper was particularly wide because there was an added stigma that came with being a Spanish deal. That stigma may not have been warranted, of course," says Behar.

The third part of the balancing act described by the other market participant, alongside fundamentals and technicals, is correlation to sovereign spreads. Behar notes that, while peripheral paper may not deserve the stigma that has been attached to it, some correlation between structured finance and sovereign bond prices is unavoidable.

"Should Italy default, then Italian long-dated RMBS performance would also be impacted, which is why there should be some correlation. However, as the market saw with Greece, structured finance by its very nature should also insulate bonds from the worst fallout from government default. For bonds backed by shorter-dated collateral, even if the government was to default, you would likely get your money back in relatively short order," notes Behar.

The other market participant says that in certain circumstances the correlation to sovereign spreads has all but broken down. "When the Italian sovereign worsened relative to the Spanish sovereign recently, we saw no commensurate widening of Italian ABS spreads relative to Spanish ABS," they say.

The participant continues: "The relationship is not always automatic. With weak sovereign correlation, investors are looking at benign fundamentals and are seeing pricing driven almost exclusively by supply."

Another historic driver of pricing has been ECB-eligibility. Two recently issued Portuguese ABS - Ulisses Finance 1 and Aqua Finance No.4 (see SCI's deal database) - appear to underline this point, with the senior spreads of the former pricing at plus 85bp and the seniors of the latter pricing at plus 105bp.

"ECB-eligibility certainly played a part in the difference, but it was not the only factor. There were also structural and placement process factors that added to the spread," says Behar. "Aqua is also a mixed pool, so the comparison is complicated by that, as well."

The other market participant points to Banca IMI as an example of paper changing from ECB-eligible to ineligible without any noticeable effect on pricing. "ECB-eligibility used to be a big factor in tiering, but now it seems like it might be irrelevant," they say.

That suggests that an ECB taper would have at most a limited impact on the market, just as there has been little reaction to Brexit. Behar also believes that tapering is unlikely to have a marked impact.

"The ECB's ABS purchase volumes have not been massive, but they have been relevant. When the ECB cuts back its purchases, I would expect the tighter end to widen by around 10bp," says Behar.

He continues: "Demand is very high, though. That will stop paper from widening too much. The relative value to alternative asset classes in fixed income will remain attractive."

JL

ABS

RFC issued on gas prepay approach

S&P has requested comments on its methodology for rating US physical commodity prepayment ABS transactions. Such bonds are backed by the payment obligations of municipalities for the delivery of gas and counterparties that hedge gas price fluctuations. Contractual guarantees cover the performance risk of the gas supplier, which is paid upfront for the delivery of gas to the municipalities over time.

Gas prepay securitisations provide tax-exempt financing for municipalities and are issued to prepay long-term supplies of natural gas at discounted prices over a set period of time. In turn, the municipalities benefit from locked-in gas price discounts below market price on a long-term basis.

S&P notes that key credit factors in its analysis of these deals include counterparty credit quality of the municipality, the gas supplier or its guarantor, and the hedging and liquidity providers. Other credit factors comprise liquidity facilities and cashflow mechanics, as well as legal analysis.

"Generally, the gas supplier or its guarantor provide the gas delivery guarantees and fund operating and reserve accounts for liquidity in a securitisation," the rating agency explains. "If a transaction terminates early, the gas supplier is obligated to make a termination payment. In addition, if the municipality for any reason fails to take the gas delivery, then the gas supplier can remarket the gas to usually a qualified end-user to protect the tax-exempt status of the transaction."

Credit ratings on gas prepay ABS are typically based on the lowest counterparty rating of the multiple counterparties in these transactions. However, for counterparties that are in scope of S&P's counterparty criteria, it generally uses the maximum potential rating applicable under that criteria as the applicable rating.

The agency notes that this weak-link approach is based on the presence of multiple credit dependencies that together mitigate cashflow risk on the rated notes by hedging price risk for the commodities, providing termination payments upon certain events that would repay all outstanding bonds plus accrued interest, and specifying strict timelines for each party that limit the time of exposure to their credit risk.

In a typical gas prepay transaction, the issuer is an SPE that finances the transaction with tax-exempt debt and delivers the bond proceeds to the gas supplier, which is then contracted to deliver predetermined gas quantities according to a negotiated schedule at an indexed price. Gas quantities can be either level or shaped to meet the utilities' expected seasonal needs, but should always be less than its expected needs.

The issuer receives ongoing payments from the municipalities at a market price minus a discount, which is then converted to a fixed price per unit through a commodity swap arrangement. Along with the interest rate swap, this produces a net cashflow that is sufficient to cover debt service payments. The swap providers must be independent from the gas supplier for the transaction to be assessed as tax-exempt under IRS guidelines.

The gas supplier is obliged to make a termination payment equivalent to the present value of the undelivered gas if a termination event occurs. Transactions are structured for the termination payment to be sufficient to repay par, plus accrued interest, on the rated debt at any time during the transaction's life, according to S&P. Termination payments are typically paid within two to three months following a termination event; hence, the structures often include a form of liquidity protection for this period.

Market participants are invited to submit their comments on the proposed criteria by 28 August.

CS

ABS

Debut diamond ABS prepped

Diarough Group - the trading name of Egon Holdings and Emby International - is marketing its first public ABS, having issued a private inventory securitisation in 2007. Dubbed Four Seas 2017-1, the latest US$150m transaction is collateralised by Diarough's rough and polished diamond inventory and outstanding receivables.

KBRA has provisionally rated the transaction single-A in respect of the US$75m class A1 notes and the US$75m class A2s. The anticipated repayment date is August 2021 for the A1s and August 2024 for the A2s, while the legal final maturity date for both is August 2027.

The transaction features a borrowing base concept, whereby the eligible collateral balance must equal or exceed the then outstanding aggregate debt balance, as of the close of business on Friday of every week. Failure to cure any shortfalls for three consecutive weeks would result in a rapid amortisation event.

The borrowing base also includes limitations on diamond type, weight, colour, cut and clarity, as well as jurisdictional limitations on where the inventory is maintained, which KBRA notes is broadly positive for the transaction. The rating agency adds that Diarough is owned and run by the Parikh family, which is becoming more involved in the business and has significant financial interest in it, providing over US$40m of subordinated notes and equity.

The rating agency comments that if any note class is not fully refinanced on or prior to its respective ARD, all excess cashflow is applied to pay down principal. No amortisation is required for the senior notes prior to the ARD. However, the weekly borrowing base mechanism is designed to ensure that the transaction maintains sufficient collateral coverage for noteholders during any given weekly period.

The transaction's structure is also supported by a non-declining cash reserve account of US$7.5m at closing that can be utilised to pay senior expenses and interest on the notes. Furthermore, the transaction is supported by Epsilon Economics as valuation and reporting agent, as well as by Brink's Global Services as back-up servicer, due to the specialised nature of the collateral and areas in which it's located.

Potential risks are posed by the synthetic diamond market, according to KBRA, which has grown in the last decade due to technological advances that have reduced the cost of synthetic diamonds, resulting in further "headwinds" for diamantaires. Furthermore, the diamond industry has a higher risk profile in general, with a number of firms and individuals recently subject to negative press reports regarding tax minimisation and other negative operations.

Guggenheim Securities is initial purchaser on the transaction and the trustee is BNY Mellon.

RB

ABS

Inaugural aviation ABS readied

Sky Aviation Leasing International is in the market with an inaugural securitisation. Dubbed S-JETS 2017-1, the US$780.8m transaction is collateralised by a portfolio of 21 aircraft on lease to 16 lessees located in 13 countries.

As of 1 August 2017, the initial weighted average aircraft age of the portfolio is approximately 3.4 years, with a remaining lease term of approximately 7.5 years and an initial value of approximately US$991.7m. As of 30 June 2017, the 21 aircraft included in the portfolio represent approximately 55.3% (by number of aircraft) of Sky's portfolio.

KBRA and S&P have assigned the same provisional ratings on the transaction of single-A on the US$657.8m class A notes (which are expected to price with an interest rate of 3.97%), triple-B on the US$81m class B notes (5.93%) and double-B on the US$42m class C notes (7.38%). The transaction has a legal final maturity of 15 August 2042.

The issuer is a Bermuda company and Irish tax resident and will issue the A, B and C fixed rate notes and use the proceeds of the issuance to acquire the 21 aircraft. The portfolio comprises 18 narrow-body passenger planes and three wide-body passenger planes.

A notable strength of the transaction is that the portfolio is younger relative to other recent ABS transactions, with an initial weighted average age of approximately 3.4 years, as of 1 August 2017. Furthermore, all of the aircraft in the portfolio are in production and represent one of the most liquid securitised aircraft fleets.

Other strengths include sufficient credit enhancement, along with a structure that accelerates principal payments on the notes upon a deterioration of asset performance. There is also a maintenance reserve mechanism that has a forward-looking feature, liquidity facility covering nine months scheduled interest on the class A and B notes, and many lessees in the portfolio are domiciled in regions where the commercial aviation market has evolved rapidly and had good growth prospects.

Potential transactional risks are the cyclical demand aspect of aviation and that the lessees have low credit quality - although this isn't unusual for aircraft securitisations, according to S&P. The rating agency adds that the expected final payment date is a year longer, at eight years, than other recently rated transactions backed by younger aircraft.

S&P adds that the aircraft in the portfolio are owned by pre-existing entities and subject to prior refinancings and so there is risk associated with potential liabilities arising from a pre-existing asset-owning entity's previous leasing activities. All prior financings on the aircraft in the portfolio will, however, be paid off before being purchased by the issuer and, if possible under local law, local counsel will perform lien searches to confirm that no liens exist on the aircraft other than those that will be discharged on the date the aircraft are sold into the structure.

In addition, S&P notes, the seller provided representations and warranties that there is no litigation, proceedings or claims against the aircraft. Therefore, the agency views the risk from their past activities as minimal.

Deutsche Bank is the structuring agent on the transaction, Credit Agricole is liquidity provider and Wells Fargo is trustee.

RB

Structured Finance

SCI Start the Week - 31 July

A look at the major activity in structured finance over the past seven days.

Pipeline
The rate of pipeline additions stayed consistent last week. There were six new ABS, five RMBS and five CMBS added.

The ABS were: Chesapeake Funding II Series 2017-3; US$140m JG Wentworth XXXIX Series 2017-2; US$300m PFS Financing Corp Series 2017-B; US$501.06m Prosper Marketplace Issuance Trust Series 2017-2; CNY2.52bn VINZ 2017-2 Retail Auto Loan Securitization Trust; and US$700m Westlake Automobile Receivables Trust 2017-2.

The RMBS were: US$125.82m Bayview Opportunity Master Fund IVb Trust 2017-RT2; US$443.8m Flagstar Mortgage Trust 2017-1; £397m London Wall Capital Investments; US$330m New Residential Mortgage Loan Trust 2017-5; and Puma Trust 2017-1.

The CMBS were: US$334m GS 2017-500K; US$200m GS Mortgage Securities Corporation Trust 2017-STAY; Hunt Commercial Real Estate Notes 2017-FL1; US$243.8m RCMF 2017-FL1; and US$898.7m UBS 2017-2.

Pricings
The number of prints also remained broadly consistent with the previous week, although there were slightly more ABS last week. In total there were 12 ABS, an ILS, six RMBS, five CMBS and seven CLOs.

The ABS were: US$518.68m American Express Credit Account Master Trust Series 2017-5; US$221.3m DRB Prime Student Loan Trust 2017-B; US$733.62m Drive Auto Receivables Trust 2017-2; US$650m Dryrock Issuance Trust 2017-2; €850m FCT Cars Alliance DFP Germany 2017; C$575m Ford Floorplan Auto Securitization Trust Series 2017-F1; €620m Ginkgo Master Revolving Loans 2017-1; US$172.75m HERO Funding 2017-2; US$232.9m Laurel Road Prime Student Loan Trust 2017-B; US$399.39m Nelnet Student Loan Trust 2017-2; US$1.2bn Toyota Auto Receivables 2017-C Owner Trust; and US$660.68m World Omni Auto Receivables Trust 2017-B. The ILS was US$290m Fonden Series 2017-1.

The RMBS were: €2.45bn Caixabank Consumo 3; £320m Charter Mortgage Funding 2017-1; €869m Dutch Property Finance 2017-1; Freddie Mac Whole Loan Securities Trust Series 2017-SC02; €9.242bn Red & Black Home Loans France 1; and US$240m Verus Securitization Trust 2017-2.

The CMBS were: US$931.6m CD 2017-CD5; US$125.7m CSMC Trust 2017-MOON; US$911m JPMCC 2017-JP7; US$469m JPMCC 2017-MAUI; and US$150m West Town Mall Trust 2017-KNOX.

The CLOs were: US$598.1m Ares CLO 2015-2R; US$552m Carlyle Global Market Strategies 2013-1R; US$609.9m Dryden Senior Loan Fund 2017-50; US$483m Nassau 2017-1; US$457.3m OCP CLO 2016-11R; US$511.5m Octagon Investment Partners 32; and US$456m Wind River CLO 2015-1R.

Editor's picks
Self-cert 'drafting error' unlikely to stand: A recent amendment to Article 17 of the new European securitisation regulations would ban self-certified mortgages from all new securitisations, sparking concern about the impact this might have on the European RMBS sector. However, the clause appears to be a drafting error and is expected to be corrected before the final rules are implemented...
Synthetic mortgage 'game changer' awaited: The inclusion of mortgages in leverage ratio calculations and lower risk weights for the asset are at present limiting the issuance of synthetic RMBS. Indeed, capital relief trade players are awaiting the EBA's forthcoming risk transfer guidelines to introduce regulatory consistency and clarity over the future of the product...
Bond classification trends eyed: Banks have favoured adding hold to maturity bonds to their portfolios in recent years. However, new FASB accounting rules are set to allow prepayable assets to qualify for hedge accounting, which could see bank demand increase for available for sale agency RMBS and CMBS securities...

Deal news
• Flagstar Bank is in the market with an RMBS which exhibits a unique servicing structure (see SCI's deal pipeline). Flagstar Mortgage Trust 2017-1 is Flagstar's first issuance since the financial crisis and marks a departure from previous offerings as it is backed by prime mortgage loans.

Capital Relief Trades

Risk transfer round-up - 4 August

Capital relief trade players are expecting a quiet August, before the flurry of activity that will define Q4. Nevertheless, rumours are circulating that a regulatory call might be executed on a transaction that HSBC closed last year. This follows the Cooperative Bank's regulatory call of its Calico Finance capital relief trade issued in 2013 (SCI 1 August).

CLOs

Reinsurance firm taps CLO market

Nassau Re has priced an inaugural US$438m CLO. Dubbed Nassau 2017-I, the transaction is a broadly syndicated CLO managed by NCC CLO Manager, a wholly-owned subsidiary of Nassau Re affiliate Nassau Corporate Credit.

Rated by Fitch and S&P, the transaction comprises US$231.3m AAA/AAA rated class A1A notes (which priced at three-month Libor plus 132bp), US$30m AAA/AAA A1Bs (3.28%), US$59.5m NR/AA A2s (180bp), US$29.8m NR/A class Bs (270bp), US$21.2m NR/BBB- class Cs (385bp) and US$19.2m NR/BB- class D notes (618bp). There is also a US$47m unrated equity tranche.

The collateral comprises at least 90% senior secured loans, with a minimum of 85% of the issuers based in the US or Canada, and a maximum of 60% of the loans can be covenant-lite.

S&P notes that compared to other CLOs it has recently rated, Nassau 2017-I has lower total leverage at 8.32x and lower subordination at 40.34% for the triple-A level and 15.11% for triple-B, compared to the three-month average. Weighted average cost of debt is also lower on average at 1.77%, while the deal has higher WAS and available excess spread than the three-month average of 3.79% and 2.02% respectively. Both suggest a stronger underlying portfolio from a cashflow perspective.

Additionally, by S&P's measures, the portfolio has a higher obligor diversity measure at 126.58%, compared to 120.52%. The portfolio's top obligor holdings are in the electronic equipment, instruments and components, diversified telecoms services, media, internet software and services, and commercial services and supplies industries.

The transaction has a non-call period end date of 15 October 2019, reinvestment period end date of 15 October 2021 and stated maturity date of 15 October 2029. Placement agent is Natixis, while US Bank is the trustee.

NCC CLO manager was founded in February to focus on sub-investment grade debt asset management through the formation of CLOs and other types of investment portfolios. NCC CLO Manager is a "relying adviser" of NCC, which under the terms of a shared services agreement will provide NCC CLO Manager with personnel and investment management services.

Nassau Re - which currently has US$17bn in assets - was founded in 2015 with an investment of US$750m from Golden Gate Capital. The firm's existing subsidiaries specialise in life insurance, annuities, long-term care and other insurance products, as well as asset management, life insurance sales and distribution, and long-term reinsurance.

RB

CLOs

Libor gives CLOs pause

UK FCA ceo Andrew Bailey last week suggested that financial markets should transition away from Libor benchmarks to transactional-based reference rates by end-2021. His speech caught the attention of the CLO industry in particular, given Libor's central role as a reference rate to calculate interest income on debt tranches, as well as on the majority of underlying loan collateral.

"The CLO market faces the Libor question from two fronts: the underlying loans and the CLO liabilities," Wells Fargo structured products analysts observe. "We believe that changing the reference rate on the underlying loans may be easier than changing the rate on the CLO liabilities, due to amendment consent requirements. Loans typically have a fall-back option of Prime as a reference rate."

In his speech, Bailey pointed to global initiatives underway to select alternative benchmarks, including a broad Treasuries repo rate and EONIA. ISDA also provides a mechanism for benchmark substitution that could potentially redefine Libor as the product of another index plus a credit spread.

However, CLO indentures appear to be largely silent on the issue of replacing Libor. Most indentures typically require 100% investor consent to change the note interest rate, which may mean that 100% of investors in a CLO must approve any change in the underlying reference rate for liabilities.

The Wells Fargo analysts suggest that any amendment requiring 100% approval could become contentious, as investors could seek to maximise any advantage posted by rate differences. Additionally, 100% approval could be operationally problematic, given the need to locate every investor.

Nevertheless, CLO indentures often contain a clause stating that if Libor can't be calculated using the prescribed methods, it can be determined based on the previous interest determination date. Some CLO documentation also states that if a Libor calculation is no longer available, the collateral manager can use commercially reasonable efforts to select a new market standard for purposes of the base interest rate calculation. Further, a number of managers appear to have anticipated a change in Libor, with newer CLO indentures including a base rate amendment allowance based on a majority of each class approving.

Indeed, JPMorgan CLO strategists expect that new CLOs will more specifically address procedures to change the benchmark rate. "There is also the question of economic impact, but it could be some time before new benchmarks are agreed upon. This will likely take cues from what the loan market eventually uses, in order to minimise asset-liability mismatching," they note.

While regulators can press banks to participate, it is anticipated that buyside willingness to be involved will heavily influence whether the new reference rate is a success. This will, in turn, likely depend on how well the regulators can overcome the operational challenges of such a large-scale overhaul. In the meantime, the Wells Fargo analysts warn that dealers, hedgers and investors will need to manage the basis between Libor and the new rate structure.

CS

NPLs

NPL servicer breaks new ground

Alvarez and Marsal has established the first independent business loan servicing company in Greece. Named Independent Portfolio Management (IPM), the fully owned subsidiary has been granted a servicer license by the Bank of Greece for the management of claims from loan and credit facilities in accordance with the local legal and regulatory framework.

"IPM is not a captive servicer owned by a fund, hence it can manage assets of multiple funds and likewise source capital from multiple providers," says Marios Koliopoulos, ceo of IPM and md and country head of Alvarez and Marsal in Greece.

The lack of servicing capacity has long been recognised as the most significant impediment to the Greek non-performing loan market's development. One driver has been the reluctance of Greek systemic banks to outsource their internal units to external servicers (SCI 15 March).

IPM will focus on SME and corporate portfolios with a turnover of at least €1m. Currently, Greece has the second highest non-performing exposures (NPE) ratio in the eurozone, at approximately 45% and totaling approximately €108bn, which the Greek systemic banks are expected to reduce by 40% by the end of 2019.

The focus on SME and corporate portfolios is notable, since it points to one of the strengths of the platform - which is its flexibility. Corporate exposures, for instance, tend to be larger and less granular, while the opposite holds for SME loans.

In the Greek context, the latter tend to range from total exposures as low as €3m to €5m. Consequently, the platform is flexible enough to be scaled up or down, depending on the size of the portfolio.

Investors, in turn, can monitor the progress of the recoveries through tailored reports provided by IPM.

The preferred strategy for NPL recoveries is a consensual extrajudicial option. IPM will develop restructuring strategies in line with the Bank of Greece's code of conduct and the pertinent legal framework - including the Greek bankruptcy code (3588/2007), which was amended in December 2016.

The out-of-court legal framework - which is expected to be enacted tomorrow (3 August) - should support these efforts. The long-awaited law (4469/2017) regulates the restructuring of arrears owed by private sector firms to the Greek state and the banks.

One of the highlights of the law is a 120-month instalment plan for arrears over €3,000, with a minimum monthly instalment of €50. Mandatory provisions in the bill include a full commercial assessment of the value of real estate held by debtors, otherwise the property's value will be assessed through objective tax criteria - the regime used by the tax bureau to impose annual property tax fees.

Licenses have previously been granted to other servicers, such as KKR, Aktua and Pillarstone, indicating a change of sentiment in the Greek NPL market. Koliopoulos concludes: "Overall, stability is improving and the conclusion of the second bailout review has been conducive to improved investor sentiment."

SP

Risk Management

ISDA working on derivatives smart contracts

Smart contracts and distributed ledger technology could bring cost and efficiency benefits to the derivatives market, says a new whitepaper from ISDA and Linklaters. Along with the whitepaper, ISDA has launched an industry legal working group to focus on smart contracts.

In order to unlock value in the derivatives market and realise the benefits smart contracts and distributed ledger technology could bring, work is underway to standardise and formalise clauses within ISDA's legal documents and ISDA Definitions. The whitepaper outlines a possible near-term application of a smart contract for derivatives and underlines the importance enabling legal clauses and actions within the ISDA Definitions to be represented and executed via smart contract code.

ISDA says that preparations are underway to update and future-proof documentation, starting with the 2006 Definitions for interest rate and currency derivatives. The new working group has been launched in conjunction with other work to develop common data and process standards to facilitate the interoperability of new technologies such as smart contracts.

ISDA notes that the common data and process hierarchy work it is leading is critical to developing the operational building blocks for smart contracts. Such work complements its development of smart contracts and broader governance structures, with its whitepaper exploring where a smart contract can be applied to automate the execution of certain specified actions and also where a broader governance framework for non-operational legal agreements can be applied to future-proof existing product definitions and legal documents.

"The ISDA Master Agreement is possibly the most successful legal contract of all time, but the advent of smart contracts offers the possibility for it to become even more powerful. This paper is the first step in considering how that can come about," says Paul Lewis, derivatives and structured products partner at Linklaters.

The whitepaper establishes several key points, not least the difference between smart contract code and a smart legal contract. Whereas the former refers to code designed to execute certain tasks, the latter refers to elements of a legal contract being represented and executed by software.

It is also noted that certain operational clauses within legal contracts lend themselves to automation, but others, such as the governing law of a contract, are less easily rendered into machine-readable code. Some legal clauses are subjective or require interpretation, which also creates challenges.

The whitepaper says that a possible near-term application of a smart contract is for the legal contract to remain in natural legal language, but for certain actions to be automated via a smart contract. This would require actions such as payments and deliveries to be represented in a more formal, standard way within the ISDA Definitions, so that they can be read by machines.

Furthermore, transaction data could be held on a permissioned, private distributed ledger made available to regulators. This step would mean that there was a single, shared representation of each trade.

JL

RMBS

Reserving practices in the spotlight again

An additional 10 legacy US non-agency RMBS were called in July, a month after Wells Fargo withheld over US$90m in cashflow across 20 called transactions (SCI 3 July). While the results this time around appear to be more investor-friendly, uncertainty remains over trustee reserving practices.

Morgan Stanley RMBS strategists estimate that only six of the deals that were called last month are included in the trustee lawsuits that served as the catalyst for June's withholding actions (SCI passim). Bank of New York Mellon is trustee for five of these deals, while Wells Fargo is the trustee on the other.

The junior-most outstanding bond of four of the called deals with BNY Mellon as trustee took small losses last month, but in most instances the loss was less than US$2,000. The Morgan Stanley strategists suggest that BNY Mellon appears not to be withholding for any current or future litigation out of the cashflow from called deals.

Meanwhile, Wells Fargo reserved on the called deal it is trustee on, but to a lesser extent than it did in June. Based on the reserving methodology employed at that time and the original loan count of the affected transaction - SARM 2004-5 - the strategists note they would have expected Wells Fargo to withhold around US$10.8m in cashflow last month.

However, the trustee only withheld US$65,000. "The reasoning behind the substantially lower reserve amount in this deal appears to be that it is also involved in the Lehman Brothers bankruptcy settlement," the strategists observe.

Nevertheless, uncertainty remains over trustee reserving practices in the legacy RMBS sector. "While a raft of calls last month that resulted in bondholders getting paid what they expected is certainly a welcome development for this market, the circumstances around these specific deals leave us with lingering questions. While the jury is out on both Wells Fargo and US Bank - as well as the other trustees involved in the original lawsuit - it appears as if BNY Mellon will not be withholding cash from called deals," the strategists note.

Fitch has downgraded 146 RMBS classes to single-D, after they incurred principal write-downs due to Wells Fargo's withholding (SCI 13 July). The agency notes that while some classes may ultimately recover their full principal amount, the lack of interest payments on the withheld principal payment results in a default under its rating definitions.

Fitch has also placed on rating watch negative an additional 16 classes that have not been directly affected by Wells Fargo's withholding to date, but are at increased risk for shortfalls in the future if the trustee were to continue the behaviour it exhibited on the June remittance date.

CS

Structured Finance

Job swaps round-up - 4 August

North America

Hunton & Williams has promoted a pair of litigation lawyers with securitisation experience to counsel, based in New York. Michael Kruse focuses his practice on complex commercial litigation relating to financial services and structured finance. Robert Rich focuses primarily on representing corporate debtors, secured and unsecured creditors, indenture and securitisation trustees, lessors and other parties in interest in Chapter 11 bankruptcies.

Megan Goodfellow has returned to Hunt Mortgage Group as chief credit officer for CRE, focusing on the firm's balance sheet proprietary lending group. She will be based in New York, reporting to Jim Flynn, president and cio. She was most recently at Realty Mogul, where she was a member of the executive and investment committees and oversaw underwriting, closing and asset management for debt, sub-debt and equity investments.

Monroe Capital has hired Cesar Gueikian as md and co-portfolio manager. Together with md Aaron Peck, they will lead the firm's new special situations credit strategy and manage the Monroe Capital Special Situations Credit Fund. The new business strategy will focus on origination-driven, senior and asset-based private debt, and secondary special situations with an emphasis on principal protection. Gueikian was previously founder and managing partner of Melody Capital Partners.

Kurt Oosterhouse has joined Cadwalader, Wickersham & Taft as partner in the corporate finance group, resident in the Charlotte office. Formerly the leader of Moore & Van Allen's fund finance practice, Oosterhouse has extensive experience in subscription credit facilities and fund-level credit enhancement. He has two decades of finance experience, including acquisition finance and asset-based lending.

Capital investment

PeerIQ has closed a US$12m Series A funding round, co-led by TransUnion, Hearst's Financial Venture Fund and Macquarie, along with existing investors Uprising and former Morgan Stanley ceo John Mack. With the new capital, PeerIQ intends to expand into traditional lending markets and collaborate on new product initiatives with its strategic partners, including benchmarking analysis and regulatory compliance tools. TransUnion evp Steve Chaouki and Hearst md Shea Wallon have joined the PeerIQ board.

Data disclosure

Freddie Mac is implementing new or revised disclosures for single-family fixed- and adjustable-rate MBS in connection with the Single Security Initiative. The GSE says the disclosures are a key step towards the launch of the uniform mortgage-backed security (UMBS), which is expected to occur in 2Q19. Beginning on 28 August, it will release updated disclosures providing standardised loan-level and pool-level data for all of its mortgage participation certificates (PCs).

EMEA

Angelia Chia and Ben Sandstad have joined Mayer Brown JSM's Singapore office as partners in the banking and finance practice to co-lead a pan-Asia team focusing on trade finance, structured finance and governance and advisory services. Chia previously led the global trade legal team at Standard Chartered and before that was in-house counsel for Cargill and JPMorgan. Sandstad, who previously served as the head of structured finance in Asia for Mayer Brown JSM from 2010 to 2013, returns to the firm after leading the global credit, lending and governance legal team for Standard Chartered.

Cheyne Capital has launched Strategic Value Credit (SVC), a sub-investment grade credit business, based in London and to be run by Anthony Robertson, formerly head of leveraged finance at BlueBay Asset Management. Robertson will be joined by David Lofts as portfolio manager and head of trading and origination, and senior analysts Jacopo Rubbia and Jorge Lazaro, with more hires expected. The fund will initially look at European sub-investment grade credit, seeking to identify a concentrated portfolio of misvalued securities, as well as selective distressed situations. 

Schroders has appointed Alan Cauberghs to head of private assets, including ILS. Based in the London office, he will report to Peter Harrison, group chief executive. Prior to this, he was senior investment director for fixed income at Schroders.

HSBC has hired Desiree Lam to the position of regional head of credit advisory, private banking. She was previously at UBS, as head of structured lending for North Asia.

Swiss Re has hired Edward Johnson as an ILS structurer. He comes from Leadenhall Partners, where he worked in business development.

NPL acquisition

Bain Capital Credit has acquired a non-performing loan portfolio from Banca Mediocredito del Friuli Venezia Giulia, marking its first standalone portfolio acquisition in Italy since it purchased in February Aquileia Capital Services (formerly known as Heta Asset Resolution Italia), which will service the portfolio. The portfolio has a €385m par value and comprises defaulted bilateral and syndicated loans, mainly secured by industrial, residential and commercial real estate assets.